Telecom Italia Case

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WimU University
College of Business

MBA7200| Financial Management|

Case

THIS ASSIGNMENT MUST BE SUBMITTED ELECTRONICALLY (BY ATTACHING THIS WORD DOCUMENT WITH YOUR ANSWERS FILLED IN) TO THE ASSIGNMENT DROPBOX IN WEEK 5. THE DEADLINE IS SUNDAY, OCTOBER 14 BY 11 PM. THE MAXIMUM SCORE FOR THIS ASSIGNMENT IS 20 POINTS. PLEASE SHOW ALL OF YOUR WORK.

NAME:

Telecom Italia is considering the investment in a capital project. The initial cost in year 0 is $149,000 to be depreciated straight line over 5 years to an expected salvage value of $15,000. The firm’s tax rate is 35% and it has an 11% cost of capital (the firm’s discount rate, or "hurdle" rate). For this project an additional investment in working capital of $12,000 is required and it will be recovered in full at the end of the project’s life. The project will generate additional revenues of $64,000 in year 1 and these revenues will grow annually at a rate of 10%. The additional expenses of the project will be $15,000 in year 1 and will grow annually at 8%. What is the NPV and the IRR of the Project? Would you accept or reject this problem? Precisely state the reason why.

Solution:-
Telecom Italia|
| | | | | | | |
Year|  | 0| 1| 2| 3| 4| 5|
 |  |  |  |  |  |  |  |
 |  |  |  |  |  |  |  |
Additional revenues|  |  | $64,000.00| $70,400.00| $77,440.00| $85,184.00| $93,702.40| Less: Additional expenses|  |  | $15,000.00| $16,200.00| $17,496.00| $18,895.68| $20,407.33| Less: Depreciation expense|  |  | $26,800.00| $26,800.00| $26,800.00| $26,800.00| $26,800.00|  |  |  |  |  |  |  |  |

Net gain before tax|  |  | $22,200.00| $27,400.00| $33,144.00| $39,488.32| $46,495.07| Less: Tax @35%|  |  | $7,770.00| $9,590.00| $11,600.40| $13,820.91| $16,273.27|  |  |  |  |  |  |  |  |

Net gain after tax|  |  | $14,430.00| $17,810.00| $21,543.60| $25,667.41| $30,221.79| Add:...
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